UnitedHealth CEO McGuire to step down

The Associated Press

Published Monday, October 16, 2006

MINNEAPOLIS -- The stock options scandal claimed its biggest corporate chief yet on Sunday, with UnitedHealth Group Inc. saying Chairman and CEO William McGuire would step down because an outside report found that his option grants "were likely backdated."

UnitedHealth, the nation's second-largest managed care company, named its President and Chief Operating Officer Stephen Hemsley to be the new CEO. It installed Richard Burke, the founding CEO of UnitedHealth's predecessor company, as chairman.

In one example after another, the report by a firm hired by the company's board said McGuire's huge awards of stock options got a boost in value because they were issued on one day but priced as if they'd been issued earlier, when the stock price was lower.

That prompted UnitedHealth's board to announce sweeping changes on Sunday. McGuire will step down immediately as chairman and as a director.

The UnitedHealth shakeup adds to the list of corner-office victims of stock option backdating. At least 30 senior executives or directors at 16 companies with stock option problems have resigned or been fired.

There may be many more to come: At least 135 companies have disclosed Securities and Exchange Commission, Department of Justice or internal investigations according to an Associated Press review.

This past week, McAfee Inc. and CNet Networks Inc. both announced their CEOs would resign, and McAfee also fired its president.

McGuire became president and chief operating officer of what was then United Healthcare Corp. in 1989, and was named chairman and CEO in 1991. Through acquisitions he engineered UnitedHealth's rise from a regional health insurer into one of the largest managed care companies in the country.

McGuire has pushed for more efficiency in the delivery of health care by measures such as putting patient information in a magnetic strip on the back of insurance cards, and encouraging customers to use the Internet instead of live phone operators for tasks such as switching doctors.

Shareholders loved it. Adjusted for splits, UnitedHealth shares rose from about 30 cents per share in 1990 to a peak of $62.14 in December. A $10,000 investment then would have been worth more than $2 million at its peak.

UnitedHealth's board rewarded McGuire, granting him options to buy shares. As the stock price rose the value of those options swelled to $1.6 billion by the end of 2005.

Then in March, the Wall Street Journal reported that McGuire had received stock options on the days the company's stock price hit yearly lows in 1997, 1999, and 2000, and that other options grants had occured on low spots in the company's share price. Statistically, that was nearly impossible unless the options were granted retroactively.

On Sunday, the firm hired by UnitedHealth's directors found that was probably the case.

The firm looked at 29 options grants between 1994 and 2006. It found that most of those options grants didn't show a written grant date or price until weeks or, in one case, nearly a month after the grant date.

The report concluded that "many of the options grants were likely backdated."

The report found 8 cases where options were granted on the lowest price of the quarter, all of them before Aug. 29, 2002, when the Sarbanes-Oxley law began requiring quicker disclosures of stock options grants. After that, the number of such well-timed options grants dropped to zero.

The report said McGuire claimed he did not pick the dates for options given to executives and employees. But the report found that assertion contradicted by documents and e-mails, including some that he wrote after purported options grant dates, but referring to the options that "should be awarded."

The report also found that UnitedHealth's options-granting policy for new hires "amounted to backdating in order to obtain a favorable strike price," the price at which the option becomes profitable.

Between 2000 and 2002 UnitedHealth awarded new employees shares that were sometimes priced as if they were granted before they were even hired. The report said UnitedHealth would find the lowest share price between when a prospective employee was first contacted, or when they were offered a job, and the end of the quarter.

Backdating stock options isn't always illegal, but failing to disclose it can trigger tax and regulatory problems. Indeed, on May 11, UnitedHealth acknowledged a "significant deficiency" in its handling of stock options and said it may have to restate as much as $286 million in earnings for 2003, 2004, and 2005.

The company said McGuire had agreed to reprice his stock options to their yearly highs in 1994 through 2002 "and take any other appropriate action to eliminate any possible financial benefit from options-related issues identified in the report."

UnitedHealth has disclosed that the IRS asked it for documents dating back to 2003 concerning stock options and other compensation for some executives. It has also been subpoenaed by federal prosecutors.

Sorting out the accounting for the options mess already caused UnitedHealth to miss filing its audited second-quarter results with the SEC. On Sunday it said it would probably miss the deadline for filing its audited third-quarter results, too, although it will release its unaudited results on Thursday as planned.